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Shareholders’ Council Releases Annual Report

FONTERRA SHAREHOLDERS’ COUNCIL

23 August 2003

Shareholders’ Council Releases Annual Report

The Fonterra Co-operative Group’s Shareholders’ Council have today released their Annual Report to Shareholders. The full report is available on Fonterra’s website www.fonterra.com.

“This is the first report prepared by the Shareholders’ Council as part of its constitutional role in reporting on Fonterra’s performance,” said Council Chairman Tony O’Boyle.

“While the report does raise some concerns about the performance of the Co-operative it also acknowledges successes and the Council remains committed to working constructively with the Board and management of Fonterra.”

This has been released today to ensure shareholders have some access to the report before the Accounts Meetings and to address the Council’s concerns with recent media speculation.

In acknowledging the successes the Council noted that Fonterra had completed a very complex merger process that addressed the structural inefficiencies of the industry. “Completing the merger has been a huge undertaking and the Council is pleased to note that merger benefits are ahead of budget.

“New Zealand Milk has also performed well and this is commented on in the report.”

The Council also welcomed the New Economics and the transparency it brings to financial reporting.

In presenting its report the Council also expressed its disappointment at some areas of performance.

“NZMP has not performed as well as we would have expected and there remains a significant gap between the AMR and the CMP. Yields and grades were also below budget and fixed and working capital intensity is too high and deteriorated during the year.

The Council also noted that:

- The balance sheet is weaker than forecast, in part due to the opening fair values being less than forecast.

- There is insufficient focus on minimising costs

- Corporate overheads are too high with the structure of the business contributing to this

- There is an insufficient return on funds invested, based on the preliminary EVA analysis and comparison to S&P’s benchmarks

- Management information systems are inadequate.

In concluding Mr O’Boyle emphasised the Councils willingness to work with Board and management.

“The Council and the Board are determined to move forward together in the interests of shareholders.”

Ends.

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